Just Because Cryptocurrency Isn't 'Legal Tender' Doesn't Make It Illegal

Central bank warnings about crypto assets may give the impression that cryptocurrency is illegal, especially since these entities often cite reasons as to why they’re uncomfortable with virtual currencies encroaching on their turf. But their assertions are often inaccurate, particularly when it comes to determining the legality of cryptocurrency.

A Currency Legitimized by its Owners

On Jan. 24, Singapore’s ministry of law, in an apparent reaction to the growing acceptance of virtual currency, cautioned that cryptocurrency is not legal tender and advised businesses to exercise due diligence before accepting it as a form of payment. The ministry’s pronouncement follows the sealing of a partnership between a jewelry chain store called SK Jewellery and Singapore-based point-of-sale systems firm Bizkey Network to operationalize cryptocurrency payments.

Elsewhere, the Central Bank of Samoa has previously warned citizens that it does not issue or regulate cryptocurrencies. The central bank maintained that cryptocurrencies are not legal tender in Samoa, warning that digital coins are risky and speculative. In Zambia, where cryptocurrencies have yet to register substantial trade volume, the central bank has issued a similar warning.

However, it is important to clarify what “legal tender” means in order to determine the intent of the authorities – who are torn between skepticism and proactive anticipation of crypto disruption – in perspective. Legal tender is a payment method that is sanctioned by law for the settlement of a debt or financial obligation within a particular jurisdiction. Fiat money issued by the central bank of a country is legal tender – a binding medium for the fulfilment of a transaction between parties.

However, this does not rule out the legality of other payment methods. For example, individuals may, at their mutual convenience, enter into transactions using currencies issued in other jurisdictions. During Zimbabwe’s hyperinflationary era, particularly between 2006 and 2009, there was widespread trading in U.S dollars, Botswana pula and South African rand.

While these were not legal tender in Zimbabwe, they were not illegal and the government blessed their already widespread use in 2009 by officially adopting a multi-currency financial system. Besides foreign currencies, non-fiat mediums such as cheque and credit card are also widely used without being legal tender.

Scotland’s Legal Currency Which Isn’t Legal Tender

In the U.K., Scottish bank notes are a legal currency approved by the U.K. parliament but they are not legal tender, even in Scotland. “Whether or not notes have legal tender status, their acceptability as a means of payment is essentially a matter for agreement between the parties involved,” a Scottish bank advises.

Disclaimers occasionally issued by governments with respect to cryptocurrencies are uniformly applied to other non-legal tender payment methods without making them illegal. Regulatory authorities, perhaps, feel more need to level these designations against cryptocurrency because they are a novel phenomenon most people are still coming to terms with. Crypto, as non-legal tender, is not a legally enforceable payment method, as one party cannot insist upon the other accepting it in a transaction.

According to a Library of Congress article on global regulation of cryptocurrencies, government warnings on virtual money are a form of public education. “Such warnings, mostly issued by central banks, are largely designed to educate the citizenry about the difference between actual currencies, which are issued and guaranteed by the state, and cryptocurrencies, which are not,” the article detailed.

“Most government warnings note the added risk resulting from the high volatility associated with cryptocurrencies and the fact that many of the organizations that facilitate such transactions are unregulated. Most also note that citizens who invest in cryptocurrencies do so at their own personal risk and that no legal recourse is available to them in the event of loss,” it added.

Governments Aren’t Responsible for Cryptocurrency

At Davos recently, Bank of England governor Mark Carney accused cryptocurrencies of not going anywhere. He argued that cryptocurrency would not revolutionize the financial sector because they are more assets than currencies. Carney also noted the reluctance of e-commerce giants in UK to transact in cryptocurrency because of the relative expense and lower speed.

At any rate, government warnings about trading in cryptocurrency do not infer their illegality. Rather, it means that they are not the institutional responsibility of the governments, something that is actually a fundamental feature of cryptocurrencies.

Recently, central banks, with the encouragement of the IMF, have considered the idea of issuing their own digital currencies, faced with the disruptive wave of cryptocurrencies. Central bank digital currencies (CBDCs) will not upstage cryptocurrencies as they will not match the characteristics of cryptocurrencies as an autonomous form of money controlled by its owners, transacted peer-to-peer and insulated from the overbearing whims of governments, legacy financial institutions or corporations.

Clarifying its decision to accept crypto, Singapore’s SK Jewellery maintained that there is nothing legally amiss with this payment mechanism. “The acceptance of crypto merely serves as another option of payment for our customers and, other than it being a more unconventional mode of payment now; it’s business as usual,” the company spokesperson said.

Government warnings cut both sides. They help citizens and businesses decide how far they can trade in cryptocurrency as an unregulated instrument of trust. On the other hand, they serve to reaffirm cryptocurrencies’ fundamental power as an instrument of financial freedom.

What do you think about the legal status of cryptocurrency? Let us know in the comments section below.

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Jeffrey Gogo

Jeffrey Gogo is an award winning financial journalist based in Harare, Zimbabwe. A former deputy business editor with the Zimbabwe Herald, the country's biggest daily, Gogo has more than 15 years of wide-ranging experience covering Zimbabwe's financial markets, economy and company news. He first encountered bitcoin in 2014, and began covering cryptocurrency markets in 2017

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